Partner Content

Ever more complexity demands making the best use of balance sheets

As market demand continues unabated for global programmes, Nigel Leppitt, global head of client services and multinational business at AGCS, discusses the evolving global programme landscape

Market demand has remained strong for global programmes as the risk spectrum for companies operating across jurisdictions changes and becomes more complex – and as companies continue to deal with the Covid-19 pandemic.

Nigel Leppitt, global head of client services and multinational business at AGCS, believes: “Covid-19 has caused some companies to review the best use of their balance sheet versus pursuit of traditional risk transfer. Consequently, we have seen increasing demand for both standalone captive and bundled captive solutions from the market.

“More companies are establishing captives and cell captives, and those companies with existing captives are assuming increased retentions on the traditional lines of business. In addition, because of the current market, captives are being used to assume additional lines of business such as cyber and E&O.”

For Mr Leppitt, the main advantage of setting up a global programme is simplification and coordination. International insurance programmes (IIPs) provide a centrally coordinated master programme linked to locally admitted policies and catering for the range of cross-border risks, conditions and limits that a global operating entity requires to protect its overall business while ensuring compliance, he explained.

“This is more capital and operationally efficient – for both client and carrier – than issuing multiple standalone local policies.”

The other advantage of a global programme is that both risk transfer and non-risk transfer (captive) solutions can be included inside the programme, thereby catering to the demand of the client’s risk appetite. Finally, a global programme makes it easier to anticipate and manage change for both client and risk carrier, for example if a company undergoes a merger or acquisition, then the changed risk profile can be more easily incorporated in the existing IIP.

“Digitalisation and the leverage of data remain the biggest opportunities for transformation in insurance carriers and brokers,” stressed Mr Leppitt. “The insurance sector has generally lagged other industries in digital transformation, with wholesale industry change coming more slowly, mainly due to the investment drag and sunk costs in legacy systems, embedded across the entire client-broker-carrier-fronting value chain.

“Most industry actors would agree it has been harder than expected to create the truly digital, commercial insurance ecosystem hoped for by all. Consider the initial blockchain hype and its limited scale usage outside the cryptocurrency domain to date.”

However, he said: “Where digital is now really beginning to help transform corporate insurance is in the area of application programming interfaces (APIs) and the ability for clients to exchange data and information readily with their product or solution providers through API-enabled applications. This will change the way clients and carriers interact, moving away from voice, email and sharing documents only, towards fully digital client interaction.”

It is never 100% straightforward. As he explained: “The use of APIs depends on enterprise data models and how the carrier structures its data. Insurance carriers are racing to develop client-oriented APIs without exacerbating data privacy or security risk.”

His company is taking a strategic and long-term approach to digitalisation. “Many changes are invisible to the client,” said Mr Leppitt, “such as aggressively reducing toxic and old legacy applications creating the unnecessary data fragmentation and complexity. We are investing in a new client portal – AGCS Online – that will reimagine the international client experience and needs of our corporate clients.

“This in turn will be integrated with our new global multinational programme system for all commercial and corporate clients. This will ensure real-time reporting on all aspects of their international insurance programme in the near future.”

As discussed, fundamental business risk complexity is increasing and the risk spectrum that companies have to navigate ebbs and flows. “There is no static solution to meet the shifting needs of insurance clients. Flexibility and responsiveness are the priorities for enhancing the client experience in any global programme,” said Mr Leppitt.

“I believe that as digitalisation evolves, the most important things we can offer our clients are: product breadth; geographical reach; and consistent client service and experience. But change is sometimes outside the control of the organisation and therefore a global programme can allow new products to be added.”

One example, he said, is specialist political violence cover. As recently reported in the Allianz Risk Barometer 2021, there is a measured increase in economic, political and social risk.

“Within this, if you consider the area of civil unrest alone – causing physical damage, business interruption or loss of revenues – these incidents are becoming a more significant risk for companies in the current environment,” he commented. In the annual global risk survey, ‘political risks and violence’ returned to the top ten risks for the first time since 2018.

But Mr Leppitt warned: “Businesses do not have to be direct victims of civil unrest to suffer financial losses. For example, during the ‘yellow vest’ demonstrations, shops along the Champs-Élysées in Paris were looted and heavily damaged, which drove customers away. After only a few weeks of demonstrations, the French retail federation reported that retailers nationally had lost $1.1bn in revenue.”

On the regulatory front, he said: “We have not seen any major changes to the regulatory frameworks from the pandemic that have an impact on the structure of global programmes. However, there are various US state regulators that, as a result of the coronavirus crisis, enacted legislation to broaden or extend coverage under local policies.

“Besides that, the pandemic led to numerous litigations in various countries. Most often, insureds are filing lawsuits against the insurers (such as business interruption litigation in Germany). In some countries, local regulators have taken action against insurers and instigated ‘BI test cases’ (for example in the UK, South Africa and Australia) but overall there is limited specific impact on global programmes.”

Turning to contract certainty, Mr Leppitt said: “Even our regulators globally do not yet have a consistent definition of what contract certainty means. In the US for example, no code of practice has been imposed yet. In London, the Market Reform Group defined a code of practice now being used by the London market. This prescribes that contract certainty is the idea that each party knows exactly what product is being sold at the time it is being sold, so it can be priced correctly and the purchaser understands without any fear of subsequent misunderstanding.

“Terms are expected to be agreed at the inception date of the reinsurance contract. The nine-month rule requires that the contract be finalised to written form and signed within nine months after commencement of the policy period, but allows the contract to be incepted before the contract is finalised but with evidence of cover normally to be issued within 30 days of inception for commercial organisations.”

Herein, he believes, “lies one of the main benefits of a global programme rather than a patchwork of country-level or individual agreements, policies and coverages”, adding: “At its core, the global programme concept delivers the benefits of full coverage or bridging the risk of a coverage gap by having a master that specifies the difference in coverage and limits in the master policy and ensures local policies issued are worded to good local standards.”

Mr Leppitt suggested control and coordination at global level means than the multitude of insurance guidelines and regulations are managed by the carrier rather than the client. “This is critical to the success of global programmes. Compliance is of course essential and this is also better coordinated by large global carriers, who can leverage the expertise of their entire legal and compliance teams, and their central dedicated IIP counsel.”

Turning to service quality, he said it has a number of elements and all must be addressed to secure quality and consistency. Firstly, there is the programme design.

Insureds, he said, need to ask: “Can the carrier package into a programme the right coverage and service mix to meet demand across the client’s global footprint?

“Second is fulfilment. Does the carrier meet the right service levels agreed, in terms of responsiveness for certificate and policy issuance or claims handling?

“Finally, there is client support. Is the carrier response adequate when a loss event happens or when the company changes strategy and requires mid-term team changes to the programme and its coverage? On the topic of fulfilment, to bring this to life and really improve the client experience, service-level consistency is needed across the entire supply chain, not just the owned entities of the carrier.”

With many companies considering a captive, Mr Leppitt said: “For companies that wish to consolidate their risk or a portion of their risk into a captive, typically they are seeking help to set up a global and regulatory complaint programme. Most of the Fortune 500 companies have used captives for many years to reduce their parent’s cost of risk and act as a smoothing mechanism against hard and soft markets. Consideration of captives is therefore crucial in the design aspect of global programmes.

“Because captives play a key role in coordinating a client’s global programme in terms of the traditional and non-traditional risks, they need to ensure regular analyses of their portfolio to tailor the insurance solutions they require. Risk mitigation and loss-control services are also key to identify risk management requirements at all stages of the captive lifecycle.”

When setting up a global insurance programme to cover cross-border risks, knowledge of fiscal and other regulatory country specifics is paramount, said Mr Leppitt, and captives can benefit from a global insurer’s experience on the management of local policies worldwide, while ensuring compliance across the programme.

“In a very recent programme we set up for a global client, the coverage required via the Lloyd’s syndicate was inadequate to cover the non-admitted countries. Within the global programme, we were able to provide a solution for non-admitted countries and service the needs of the client captive.

“In another case, a client decided they wanted a multi-line, multi country solution, with partial self-retention of risk in a captive. By leveraging the same network capability, both the risk-transfer and no-risk-transfer components can now be serviced to the required SLAs. This has resulted in workload reduction for the client, cost savings in one product line and improvement of the overall terms and conditions,” he concluded.

Back to top button